Is in-home day care a “business”?

Benjamin Waldner owned a house in South Dakota that he shared with his sister, Sarah, Sarah’s fiancé, Mark Decker, and others who rented rooms from Benjamin. Sarah did not pay rent, but she did keep house for Benjamin. The house was insured under a homeowners policy issued by Western National Mutual Insurance Company.

Sarah ran a babysitting service in Benjamin’s house. She provided care five days per week, generally from 9:00 a.m. to 5:00 p.m. The babysitting service did not have a name, and Sarah did not enter into written contracts with the parents. She kept no records, nor did she file income tax returns.

In March 2000, Joe Decker (Mark Decker’s cousin) and Joe’s wife, Valerie, began to use Sarah for child care for their older son. Their second son was born in May 2000, and, according to Valerie, Sarah started to care for him in August 2000. Sarah sometimes charged Joe and Valerie for her services, typically when Valerie picked up the children. When Joe dropped off and picked up the children, Sarah did not charge him because of Joe’s relationship with her fiancé.

On January 11, 2001, Joe dropped off the younger boy, who was eight months old at the time, with Sarah. When Joe left, Sarah put the child in his car seat to rest. Soon thereafter she noticed that he was choking on a small object. Sarah called for help, but the child suffered permanent brain damage.

Valerie Decker, as guardian of the injured child, filed a negligence lawsuit against both Sarah and Benjamin. Western National filed an action seeking a court declaration that it had no duty to defend either of them in the action because the homeowners policy excluded coverage for business pursuits. According to Western National, Sarah was running a business in the house at the time of the injury, and the injury was sustained as a result of the business activities. Because the policy excluded coverage for injuries resulting from activities related to the “business” of an “insured,” there was no coverage. The lower court agreed with Western National; Valerie Decker appealed.

The Western National policy contained a definition of “business” that included “services regularly provided by an ‘insured’ for the care of others and for which an ‘insured’ is compensated.” A “mutual exchange of like services” was not considered compensation.

On appeal, Valerie argued that the policy language was ambiguous and that it should therefore be construed against Western National in favor of coverage. She emphasized the fact that, on the day of the occurrence, Sarah did not charge Joe for her services. She also argued that there was a “mutual exchange of like services” because Sarah provided child care for free in consideration of the relationship between Joe and Mark.

The Supreme Court of South Dakota disagreed with all of Valerie’s arguments. It found that the policy language was unambiguous and that the child care services provided by Sarah were a “business” within the meaning of the policy, even though Sarah sometimes did not charge the Deckers for her services. The court rejected the argument that there was a “mutual exchange of like services” and concluded that because the injury was related to Sarah’s child care business, it was excluded from coverage.